It’s Great for American Consumers, But Not for Others in the U.K., Japan, and Korea
Well, this program, of course, as you know, is called The Truth about Your Future. But sometimes we really have got to stare down the present to see what our future might be looking like. And we've seen an incredible array of disarray in the financial markets on a global basis. The U.S. dollar is very, very strong right now, meaning the dollar is worth a lot more than other currencies around the world. That's really good news for the U.S., but it's really bad news for everybody else.
The British pound has hit a record low against the dollar. China's currency is at a 14 year low. The euro has hit the lowest level since 2002. Ditto for Brazil, South Korea, Tunisia. In Nigeria and Somalia, the strong dollar is pushing up the price of food, fuel, and medicine. In Argentina, Egypt, and Kenya, it's pushing them closer to default and it's slowing foreign investment in India and South Korea.
So you've got to understand that the U.S. dollar is the world's reserve currency. Multinational corporations and financial institutions use the dollar no matter where they're located. Everyone everywhere uses the dollar to set prices for their products and to pay their bills. Energy and food are priced in dollars on the world market, and so is the debt that's owed by developing nations. 40% of the world's transactions are done in dollars.
Now, a year ago, just to give you an illustration of this, if you wanted to buy $100 worth of oil in Egypt, you would have paid about 1600 Egyptian pounds. That's their currency. 1600 Egyptian pounds is about the same as $100. That was a year ago. Today, you would need almost 2000 Egyptian pounds. That's a 24% increase, even if the price of oil itself hasn't moved. And we know that it has. In Korea, everything costs 22% more because our dollar has gone so much stronger against the Korean currency. Even in Nigeria, it's 6% more. So if you're an American living here in the U.S. (and well, by the way, you are an American living here in the U.S. - that's why you're listening to this show), you're getting a bargain.
A year ago, if you wanted to buy a tin of tea from Britain, you paid about $16 today, you'd only pay $13. Even though inflation has increased the cost of tea, the dollar rose even more. So the net price of the tea is less. The net result is that you pay less to buy overseas goods than you did a year ago. Despite inflation, a box of Belgian chocolates a year ago would have cost just $60. Now $48. This is the time for you to take a European vacation. You will find incredible bargains.
The Rising Costs of Energy; U.K. Banks in Turmoil; Central Banks Marching in Lockstep
But in Indonesia, thousands of people are protesting 30% price increases on fuel. In Slovakia, they say soaring electricity costs have left their economy at risk of collapse. China is buying back its own currency to get its price to go up against the dollar.
In the United Kingdom, the British pound sterling fell to the lowest level against the dollar in 37 years and they tried to solve the problem. But instead of buying pounds, they figured they would do it by cutting taxes but that caused the pound to fall even more, and it threatened an economic collapse in England in September. In the United Kingdom, most pension funds use derivatives to hedge against interest rates and inflation. And when the British government tried to cut taxes, interest rates rose so fast that in September, pension plans got margin calls. They were facing insolvency.
They started selling stocks and bonds to raise cash, but that caused the pound to fall even further. Blackrock threatened to halt trading. The British central bank had to step in. They started buying British bonds and fortunately that ended the crisis, if only temporarily. And this whole crisis only lasted a few days.
But it reminded some folks (including me) of the Lehman Brothers debacle back in 2008. And it's not just Great Britain and China that are doing this artificial adjustment. Japan spent $20 billion to prop up the yen because the yen is at 24-year lows. The World Bank says all the interest rate increases by governments all around the world hasn't been this broad since they began keeping records in the early 1970s. Indonesia, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan, the United Kingdom, all of them have been raising rates along with us here in the US, and everybody's still doing it. And the size of these rate increases is not only in sync, it's also bigger than usual.
The World Bank said, "The cumulative effects of highly synchronous tightening of monetary and fiscal policies could cause more damage than would be expected by the policy actions of individual countries". So, in other words, everybody doing all the same thing all the same time and all to the same degree. It's compounding the problem. So what does it all mean?
The US Treasury’s Financial Stress Index Is Off the Charts
Well, the Treasury Department's Office of Financial Research, they publish a financial stress index. It's now at its highest level since May of 2020. And you know what was going on in May of 2020 - we were in the depths of the pandemic. You see, in a normal market, that index is a zero. Right now, it's 3.1. Trading conditions are getting worse in US government debt, corporate bonds, and money markets. Big interest rate increases are making it more expensive to borrow money. Inflation's forcing you to pay more for purchases. The Japanese yen is down 20%. There's been a selloff in British government bonds. Banks are stuck with loans that are now in default. Corporate bond defaults more than doubled just from July to August. Companies can't get the funding they need. Investors are less willing to take risk. And the Labor Department says there are now 1.1 million fewer job openings today than just a month ago. It's the biggest one month drop in two decades. Bank of America says its stress gauge is at what they call a borderline critical level.
You want to say how all this ends up? Look at Uniper. That's a giant energy company in Germany and it's going broke. So the German government has stepped in there buying 99% of the company, injecting $8 billion to save it. The stock fell 30% in a single day. On the news, the stock is down 90% for the year.
German officials say they might have to nationalize other companies, too. They've just deployed in Germany $200 billion from the government to deal with the energy crisis. Just to illustrate how broad this is going; Germany is now struggling to make toilet paper. The maker of the best-known brands in Germany has filed for bankruptcy. They're blaming soaring costs of energy along with pulp and transportation costs and the strong dollar, forcing them to raise prices for toilet paper 18%.
The strength of the dollar is putting pressure on airlines as well. You see airlines pay in dollars to buy aircraft and parts, even when they're buying European airlines from, say, Airbus or Virgin Atlantic. They have 60% of their costs in dollars. In India, the cost for the second largest airline, they're up 20% because of the dollar, even though inflation itself is only up nine. Flights now cost, as you well know if you've been on a plane, 42% more than in 2019.
Look what happened to FedEx. Talk about the use of aircraft. FedEx stock fell 21% in a single day on the news that Deutsche Bank said they've had the worst report they've seen in 20 years in analyzing companies. FedEx earned 33% less than expected and withdrew its earnings forecast for the next year. The company says global economic trends have, “significantly worsened both in the U.S. and internationally".
And FedEx says it's likely to get worse. FedEx isn't alone. GE says its profits are hurting. Associated British Foods in England, a major food manufacturer, is saying the same thing. The federal government started raising interest rates back in January. FedEx is raising their prices 7%. Now, the average number of packages they're handling daily is down 11% from a year ago, third straight quarter of declines.
Ford says the cost of its parts is 1.7 billion more than it expected because of inflation and supply chain problems. Ford says it can't even get enough badges for its cars. You know, the Ford logo, they can't ship 45,000 cars because they're missing parts. No wonder the Dow Jones transportation average fell 12% in September, twice as badly as the S&P 500 did. Historically, that means when the transportation index goes down, the economy is bad and getting worse.
Last year, Citigroup lent $65 billion to private equity firms. They're cutting that to $20 billion because of a new rule from the Federal Reserve that they want banks to increase their reserves. JPMorgan, the largest bank in the country, said this new rule poses a significant economic risk for the nation.
“Big Money’s” Current View
So what are institutional investors doing in this entire marketplace? How are they managing their money? They're buying record amounts of put options. These are trades that are designed to protect you against the risk of losses in the stock market. They spend $34 billion on these contracts in the last month. That's more than at any time since 2009.
Remember the credit crisis back then? Four times more than when the pandemic started. Institutional investors are telling us that the economy today is worse than when COVID showed up. In New York, they're expecting tax revenue to fall 8%, the biggest drop in 12 years, resulting in 162,000 fewer jobs than when COVID began. The job vacancy rate in New York City is now 8%.
The Painful Bite of Ongoing Inflation
In Europe, inflation is at 10%. At the International Monetary Fund, loans to economically troubled countries have hit a record $140 billion. Five countries have already defaulted on their debt. More are expected to as well - Pakistan, Argentina, Zambia, Sri Lanka, Ghana, Egypt, Tunisia. And in the middle of all this, you would say, well, gee, if interest rates are rising and inflation is rising and stocks and bonds are falling, I'm really glad I own gold. Isn't gold an inflation hedge? No. Gold has fallen to its lowest price in more than two years. So much for it being an inflation hedge. It's down 19% since March. There is, in this economic environment, nowhere to hide.
So Jay Powell, the Chair of the Federal Reserve, has issued his gloomiest prediction ever about the economic outlook. Here's what he said at a recent press conference. "We have got to get inflation behind us. I wish there were a painless way to do that. There isn't." He admitted he doesn't know what's going to happen next in our economy. And if the chair of the Federal Reserve has that attitude, what can anybody else say themselves?